An extremist, not a fanatic

June 28, 2012

Maximization vs morality

What is, or should be, the link between morality and narrow economic rationality? Three things raise this question:

- Barclays' attempts to manipulate Libor might well have been rational from the point of the traders involved, based upon weighing the benefits of doing so against any fines. But it's generally agreed that such behaviour was morally wrong if not perhaps illegal in the UK.

- Tax avoidance schemes of the sort used by Jimmy Carr have been called immoral, though their most of users believe them to be ways to maximize post-tax income.

- One reason why benefit "scroungers" are stigmatized is the belief that it is morally right to work, even if the personal (and social) benefits from doing so are small.

These three cases are all examples of how there's a clash between (perceived?) moral behaviour and rational maximization.

Which poses the question: should maximizing behaviour really be tempered by considerations of morality?

In many cases, the answer is clearly yes, because there is in fact no trade-off between rational maximization and moral conduct.As Deirdre McCloskey has argued, "bourgeois virtues" of prudence and temperance enrich both individuals and societies. Trustworthiness is one way of overcoming the problem of asymmetric information which can cause markets to fail to develop.

In other cases, though,there is a sharp trade-off between morality and economic maximization.

This is most clear in the euro. The moral belief that reckless debtors and lenders must suffer ther consequences of their imprudence is perhaps the biggest obstacle to a resolution of the debt crisis.

But it's also true in other areas. For example, social solidarity and fellow-feeling can retard growth by encouraging the emergence of "Olson groups" who lobby for special favours.

And one might argue that the trade-off also exists in the cases I started with:

- The same sort of desire to follow rules that would have prevented Barclays from manipulating Libor can also inhibit innovation. One feature of genuine entrepreneurship is the desire to reject established ways of doing things. A society in which people followed unwritten rules would have fewer Libor manipulators - but also fewer good entrepreneurs.

Now, I don't say all this to side with the sort of right libertarian who prizes rational maximization above all else. I do so merely to suggest that, sometimes (often?) there can be a sharp trade-off between morality and prosperity.The knee-jerk demand that economic actors behave more morally requires rather more thought.

Comments

I don't really understand this - narrow economic rationality entails maximizing an objective function, subject to constraints. It might often make sense to put income or consumption in the objective function, depending on the context, but economists don't take a view on what "ought" to be in ones objective function, so to speak, in real life.

Everything depends what you put in your objective function, and what constraints you operate under. I don't know what it means to "prize rational maximization above all else"

If your objective is to maximize your income, subject to mere feasibility constraints there is obviously nothing moral about that, although you may occasionally act "morally" if it helps achieve that objective. But there's nothing stopping your objective from being to maximize your moral brownie points, subject to love peace and harmony.

Your question: should maximizing behaviour really be tempered by considerations of morality? looks to me just like the age old question: why be moral?

yes there are instances where good behaviour helps achieve an objective like maximizing income, and other instance where bad behaviour helps that objective.

Incidentally, if you want an account of how what we think of as moral behaviour might emerge from what we think of as rational maximization, this is a good place to start:

@ Luis - yes, economists conventionally don't have a view on what should be in one's objective function. But the people calling for folk to be moral aren't economists. I'm talking to them.
And yes, very often moral conduct will arise from selfish maximization. The point of my three examples is that sometimes it doesn't.
My question isn't simply: why be moral? The point is rather that (sometimes) an apparently reasonable moral code might make society as a whole materially worse off.

Interesting piece, but I think its worth considering the morality of actions from a different point of view with respect to the traders...from the regulators. Having been a trader, the temptation to break rules is very high when fines are expected to be non-existent or minimal, at worst. A perplexing question is, why is it so well established that breaking rules will not be punished? What does it say about the morality of regulators that known incidences of rule breaking are effectively ignored?

My point is not to suggest that the trouble lies solely with governments, but rather that both sides are making decisions that may be viewed as immoral (Traders breaking rules and Regulators not enforcing them).

Morality, in the context of the 3 examples you give, is clearly contingent.

The Barclays et al scandal reveals a culture that considers gaming the system to be the essence of the job. This wasn't "rogue" activity, this was clearly "normal" (i.e. normative) behaviour within banks.

Tax avoidance is adherence to the letter of the law while flouting the spirit. This is amoral, not immoral. The charge of immorality (personal deficiency) by Cameron is a surrender of collective ethical responsibility - i.e. the willingness to enact laws that prevent tax avoidance. In other words, he is privatising morality and wringing his hands.

The demonisation of those on benefits is not driven by a belief in the moral virtue of work, otherwise the loudest critics would be advocating jobs digging holes and filling them in again, i.e. public expenditure. The moral aspect seems to extend no further than a selfish belief that "they" are stealing taxes from "us". It's an irregular verb: I spend my money wisely, you fritter it away, she is a welfare queen.

Slightly off-topic (but you've made similar comments before and was hoping for some clarification).

You say "A stronger work ethic would make the unemployed even more unhappy." Is that really true? Perhaps if they had that ethic they would have learned more and have a better CV and not be unemployed.

The obviously counter-argument is that there are more applicants than there are jobs. However the number of jobs is not a constant. For example, often the department in the large multi-national I work for is not explicitly hiring but if an exceptional CV appeared, budget might be found.

I'm not an economist and have no economic training, maybe I'm missing something or there is evidence it doesn't work like I naively think?

@ Jon - the aggregate level of unemployment is (largely) a function of the level of aggregate demand. A better CV would improve A's chance of getting a job at B's expense, but better CVs all round won't increase total employment - or at least, not enough to greatly reduce unemployment.
And, remember, very many of the unemployed do have good CVs and a good work ethic anyway.

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